When the Nexus S came out it was one of the first phones to have a built-in chip that enables contactless communications mobile payment systems. Today the other shoe dropped with the announcement of Google Wallet and partnerships with MasterCard, Citi, First Data, Sprint, and others.

Here's how it works: You download the Google Wallet app to your NFC-equipped Android phone and pair it with your existing credit card or Google prepaid virtual card. Then you go into any store that accepts MasterCard PayPass and wave your phone in front of the reader when you are checking out. For security, you also have to enter a PIN number on the phone. The amount of your purchase will be charged to your card, even if you don't have a network connection or signal.

Google also announced Google Offers, which is their answer to Groupon. Google Offers are deals on products and services at online and local businesses. The Google Wallet app will download the offers automatically, and it can also store loyalty cards and receipts for participating merchants.

Google Wallet is already supported by any merchant using a PayPass reader. According to Google, over 120K such terminals are in use today just in the US. And to spur further adoption, Google, in partnership with First Data, is offering a free reader and $100 of free processing to new merchants. Normal merchant credit card processing fees apply, but Google does not take a cut or charge anything extra on top of that.

Unfortunately for Android developers, the secure payment APIs and hardware will not be open except to authorized applications:

"Your payment credentials are stored in a chip called the Secure Element contained within your Nexus S 4G. The Secure Element is isolated from your phone’s main operating system and hardware. Only authorized programs like Google Wallet can access the Secure Element to initiate a transaction."

Google, however, is touting the new system as an "open commerce ecosystem:

"Google Wallet will be 'open' in these ways:

Google Wallet will support many payment instruments, with the goal being to create virtual versions of all the plastic cards that exist today.

Google Wallet will establish APIs that issuing banks can develop for that will make integrating payment instruments into Google Wallet a reasonably straightforward process.

Google Wallet will establish APIs to enable transfer of offers, loyalty programs, receipts, and more at the point of sale.

Google Wallet can be installed on Nexus S 4G available on Sprint, and potentially over time, other mobile devices and platforms as well."

The new service will be rolled out starting this summer in New York, San Francisco, and Portland on the Sprint Nexus S 4G. Expect to see it expand to more areas and other NFC-enabled Android phones soon afterwards. Payment terminals must be ISO 14443 or 18092 standard.

Suspiciously absent from the announcement was Visa, the world's largest credit and debit card processing company. Rumor has it that Visa will be partnering with Apple on a competing service for the iPhone 5.

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